January 12, 2022
Good morning,
Terror was palpable in the markets Monday morning as the Nasdaq Index (tech) plummeted again, and cracked the -10% level (from its high) intraday. Traders openly wondered if there would ever be a bid for a tech stock again. Yesterday, for whatever reason, investors reacted to Chair Powell’s comments as if Monday never happened, quickly reversed course, and rallied the market – led by tech (+1.4%). This is extreme volatility. I only point it out because I suspect it’s the kind of volatility we may have to endure in the months ahead.
The much heralded latest CPI reading was released this morning and as expected, the headline number was 7%. You already know by now that it’s the highest CPI print in decades. Market reaction: stocks up .5% in the Futures market, probably because bonds are unchanged on the news. It appears that the 7 handle was well discounted already.
Jeffrey Gundlach did his annual “Just Markets” broadcast last night. I have the highest regard for him, and think his genius is always worth sharing with readers. The take-aways from his call (Bloomberg):
- Gundlach focused heavily on signals that the U.S. economy could be weakening, saying that “I do think recessionary pressure is building” and comparing the state of the U.S. economy to the inflationary period in the 1970s under President Jimmy Carter. Consumer sentiment has weakened and “given up the ghost,” and looks to be at a recessionary level, Gundlach said.
- Gundlach went through several data points suggesting that he was right last year to predict inflation would end up topping 7%. He suggested inflation would remain elevated through the first part of the year and could “peak out”
- The Federal Reserve “seems pretty far behind the curve when you consider wage growth,” which has risen significantly, especially for entry-level wages that could spill into the broader labor market.
- Gundlach said Fed officials will likely follow the message of two-year Treasury yields, likely getting the federal funds rate to about 1.5% before wreaking economic pain and being forced to stop.
- He underscores long-term bearish call on the dollar, long-term bullish call on gold, thinks that U.S. stocks, while not looking so expensive against bond yields, are highly valued versus overseas stocks. He expects European equities to outperform in time, and he is looking for an entry point some day for emerging markets, which should enjoy a multi-year outperformance run versus the U.S. in time.
Be well,
Mike